IBM Turnaround Questioned on Slow Growth of New Businesses

IBM’s one-quarter growth streak is already in doubt, according to Bloomberg. Shares of the technology company fell in early trading after it reported narrower profit margins and no revenue growth, excluding help from a weak U.S. dollar. That cast a shadow over an effort to sell more-profitable cloud-based software to revive growth after five years of revenue declines.

First-quarter revenue came in at $19.1 billion, beating the average analyst estimate of $18.8 billion. That’s 5 percent higher than a year earlier, but flat without currency fluctuations. Margins slipped 0.6 percentage points to 43.2 percent. Earlier this year, CFO James Kavanaugh said margins would stabilize “immediately“ in the first quarter.

Growth in the cloud business was 14 percent, lower than the 2017 average of 24 percent, Bloomberg Intelligence analyst Anurag Rana said. That “puts a question mark on IBM’s hybrid cloud strategy,“ he added.

During a conference call, Kavanaugh pushed back on questions from analysts about margins and whether revenue can keep expanding. He pointed to growth across the company’s business lines, and said execution problems in IBM’s computer-storage unit and consulting business were partly to blame for the quarter’s challenges.

He described the overall picture as positive and said CEO Ginni Rometty’s goal of getting about half of sales, or $40 billion, from newer businesses was ahead of schedule. “This is a good start to the year,“ Kavanaugh said. “We’re well on pace to deliver that $40 billion earlier than 2018.“ Those new businesses represented 47 percent of revenue over the last 12 months, he noted.

On average, analysts expected IBM to lift its full-year profit forecast, but the company kept it at $13.80 a share. The company said adjusted earnings per share were $2.45 in the quarter, up 4 percent from a year earlier. Analysts were expecting $2.42 a share on average.